A New Initiative Aims to Ramp Up Charitable Giving

Why is charitable giving such an important feature of U.S. society?

Charitable organizations play a uniquely important role in the United States compared to other countries. A lot of countries fund civil society directly through government expenditures for things like public universities, public health care systems, public art. In the United States, these are not funded solely by taxpayer money, but rather through a public private-partnership. 

The government encourages individual donors to support civil society and provides incentives for them to do so through tax benefits, which operate like matching grants. Financing through the tax code puts a lot of pressure on these tax rules to produce good results, because we’re so dependent on charitable donations for many of the most fundamental aspects of our society. 

But those tax rules don’t always produce the results we hope for. What gets in the way?

The problem is that there are design defects in our current rules. The government provides generous tax benefits for charitable giving but the rules provide very little assurance that this giving will actually make its way to charities. A well-planned gift can save a donor as much as 74 percent of the value of that gift in taxes. That means a $10 million gift can cost the federal government $7.4 million in forgone taxes and therefore only cost the donor $2.6 million after in after tax dollars. 

What is the government getting for this significant investment of resources? Some of these benefits are going outright to charitable organizations that do important things, like scientific research, feeding people, housing people, developing the arts, and promoting social justice. But huge portions of these donations are going into intermediary vehicles, like private foundations and donor-advised funds.

What are the problems with the current rules around private foundations and donor-advised funds?

Right now, there’s over $1 trillion dollars set aside in private foundations and over $120 billion set aside in donor-advised funds. Donors get all the same tax benefits from putting their money in these intermediary vehicles as when they give funds outright to a working charity, like a food bank. Yet the public has no assurance of getting any benefit from this money, because there’s no requirement under current law that these funds ever be distributed for public benefit. Donor advised funds have no payout requirements under current law and private foundations can fully meet their payout requirements by giving to donor-advised funds or by paying salaries to family members. 

A related problem is that, under our current laws — particularly after the 2017 Tax Act — we provide very generous tax benefits for the wealthiest 10 percent of Americans but no tax benefits for the other 90 percent. The whole idea of the matching grant system was to reflect the pluralism of the country. Using this system instead of direct expenditures by the government was supposed to mean that everybody could support their interests, and the government would match it. But the way the charitable tax system has developed, it no longer promotes pluralism as it was intended to.

You have been working together with Arnold Ventures to launch the Initiative to Accelerate Charitable Giving, which is designed to remedy these problems. How did that come about?

For the past 10 years, I’ve been writing about problems with our philanthropic tax system, and last year I published a paper with law professor Roger Colinvaux about what charitable reform should look like. Around that time, I read John Arnold’s op-ed in the Chronicle of Philanthropy addressing similar concerns. I reached out to him, and we had a great conversation about the problems and potential policy solutions around charitable tax incentives. In that phone conversation, I asked John if he thought it made sense to gather with other philanthropic leaders with similar concerns and if he would be willing to host it, and he said ​“yes and yes.” 

We had that meeting in January 2019 and began to plan a long-term strategy for reform. However, the onset of the Covid-19 pandemic in March, and the social justice protests over the summer, served as an accelerant to our work by raising awareness of the tremendous need for charitable resources to fund organizations working to address these and other issues. We formed the Initiative to Accelerate Charitable Giving as a coalition to drive reforms.

The initiative has been described as a ​“carrot-and-stick” approach that would spur donors to give away more money at a greater rate. What are the incentives and the consequences of the tax law changes you’re calling for?

The initiative involves three steps. One is to close the tax loophole that allows private foundations to meet their payout requirements by paying salaries and expenses for family members. It’s a matter of good governance and will promote the legitimacy of the sector. It seems peculiar that somebody could create a private foundation with $10 million and fully meet the required $500,000 payout by paying their kids. It also prevents private foundations from meeting their payout requirement by giving to donor-advised funds and creates incentives for greater payouts — for example, any year in which a private foundation distributes more than 7 percent, it would not be subject to an annual excise tax. 

Second, it provides two new rules applicable to donor-advised funds. One is that the donor-advised fund has to be distributed within 15 years of contribution to a working charity, whereas under current law there’s no limit on how long a donor-advised fund can accumulate. The other is that, for donors who want longer than 15 years, we have something called the aligned benefit rule, where a donor would get some tax benefits when the money went into the DAF — saving the donor capital gains and estate and gift taxes — but the income tax deductions would be available as the money is distributed to charity. That way, there’s an ongoing incentive for donors to make distributions from their donor-advised fund. 

Third, it promotes expanding tax benefits for all Americans by creating charitable tax benefits even for those taxpayers who take the standard deduction.

Should we expect resistance to these proposals?

It’s always the case that institutions that have benefited under the status quo are resistent to changes to rules that have benefitted them. Private foundations that want to meet their payout by giving to donor-advised funds might oppose rules that say they can’t, and sponsors that benefit from long-term financial management of assets might oppose rules that require faster distribution to working charities.

At the same time, people who work in the charitable sector are not like typical interest groups — they are also deeply committed to the public good. That is why we have received the broad support that we have for our proposals.

What work will it require to see these rule changes come to fruition?

It needs to happen in two phases. One is building the coalition of supporters. We’re receiving very good responses from organizations and individuals who believe that these common-sense reforms would solve a lot of the problems of current law. 

The second part will be taking it to Capitol Hill. We’re optimistic that this issue will garner bipartisan support. Both Democrats and Republicans are interested in promoting the flow of money to charities, even if it’s for different reasons. Republicans have historically been the biggest supporters of good tax rules to get more money to charities. Insofar as they’re interested in shrinking the role of government, they know that a robust charitable sector is an essential part of that, and they have promoted some of the more aggressive reforms to the tax rules around charitable giving.

What would success look like for the initiative? Are there steps you envision even beyond what it proposes?

What’s important is that we recognize the deep policy considerations included in our tax laws. These are not just technical rules that are only of interest to tax planning for the wealthiest Americans. These rules affect how our government resources are spent, how the wealthy are taxed, and how civil society gets the resources it needs to do its important and necessary work. 

People’s eyes sometimes glaze over when you talk about tax rules, because they’re boring, intimidating, and complex, but the fundamental levers of society lie in the intricacies of these rules. It’s important we look at their details to make sure they’re producing the results we want for society. 

Why is this issue so important on Giving Tuesday?

Giving Tuesday is all about recognizing the value of charitable giving and the important work done by charitable organizations. Our work is also about that; we are trying to increase the flow of charitable dollars. We’re trying to bring every lever that one can bring to promote giving in the United States, and the tax rules are an important lever. 

If a person could give $50 to their favorite charity with no tax benefits, but under new rules they were going to get a tax benefit worth $25 from their donation, that means they could now give $75 to that charity. It would functionally increase the flow of money from everybody to charitable organizations, and it could affect the dispersal of funds. People who give small amounts often give differently than people who give large amounts, and we want to support all types of giving.